Question

Why not make the following entry when recording bad debt expense for the period? Dr. Bad debt expense, Cr. Accounts receivable

Answer 1

Answer:- first I'll explain you about what is bad debt at the end of a the fiscal year a company is preparing it's Financial statement it needs to determine what portion of its receivable is collectible. The portion that a company believe is uncollectible is what is bad debt expenses.

There are two ways of recording the bad debt Expenses:- 1.Direct write-off method

2. Allowance method

1. Bad debt Direct write off method

In this method a direct write off to receivable account. In this method bad debt Expense serve as a direct loss from uncollectible which ultimately goes against Revenue lowering your net income.

Example:- suppose a company experience large increases in their receivable account. And then in the next accounting period a lot of their customers could not pay them and this makes a company experience a decline in it's net income.

This is method is only appropriate for small immaterial amounts.

Journal entry:-

Bad debt expenses Dr.

To Account's Receivable

( To write-off debts)

2.Bad debt Allowances method

This method is used for large material amounts.

This method is used compared to the Direct write off method. But actually many companies still using the Direct write-off method for small amounts. The reason for the preference is because the method involves a contra Asset account's that goes against account's Receivable. A contra Asset is an account with an opposite balance to Accounts receivable and is recorded on the balance sheet. This contra account is important is that it exerts no effect on the income statement account's. This means bad debt Expenses does not necessarily serve as a direct loss that goes against revenue.

Their are three components of the allowance method :-

1.estimate uncollectible receivables.

2.record the journal entry by debiting bad debt expenses and crediting allowance for doubtful account's.

3. When you decide to write-off an account Debit the allowance for doubtful account's and credit the corresponding receivable account.